Managing executive remuneration, particularly for listed companies, can be a complex task with big implications for both company performance and the individuals with whom responsibility for legislative compliance lies.
Here we explore two of the more technical aspects of executive pay management – salary benchmarking and preparation of the annual Remuneration Report – which we believe go very much hand-in-hand.
In order to confidently explain the basis and rationale for executive remuneration outcomes, you’ll obviously need to ensure there is in fact a strategic approach to remuneration and incentive plan design in the first place.
A key input to your design thinking and remuneration management will be understanding trends and practices so as to determine fair and reasonable levels of pay for your executive roles.
You can read more on what goes into developing an effective remuneration strategy here or click the button on the right to download a copy of our guide to the best practice design principles for executive remuneration.
Click below for further insight to best practice executive remuneration design principles.
The regulatory and commercial environment affecting executive remuneration has been extensively transformed in recent years. A key aspect of this development is the manner in which remuneration consultants and clients interact.
Under the legislation, a Remuneration Consultant assists clients to set the level and mix of remuneration provided to executives, employees and directors.
A ‘Remuneration Consultant’ means a person who makes a Remuneration Recommendation – a recommendation regarding the quantity and mix of remuneration for Key Management Personnel.
Such arrangements referred to as Remuneration Consultancy Contracts, create particular obligations for companies. It is essential then that you consider the specific nature of the support you might require from your Remuneration Consultants in order to properly establish a formal engagement that ensures compliance with the listing rules. You can read more about the requirements and our own approach to managing engagements in our Executive Remuneration and NED Code of Practice.
Whether working with Remuneration Consultants or managing things in-house, market benchmarking provides a key input to the effective management of executive remuneration. Understanding the external market helps to ensure your salary levels are both competitive and considered reasonable by stakeholders.
One of the first, and arguably the most critical decisions you’ll need to make is which source or sources of market data to use. We’ve highlighted some of the key considerations you should work through as part of your selection process below.
Having selected your source(s) of market remuneration data there are then several quite different techniques that can be utilised to understand how current pay levels compare to the market.
Seek out surveys that include organisations and roles like yours; Benchmarking against other your peers is important, though if you hire from outside of the sector, referencing general industry market data may also provide relevant insights.
Know how to talk the talk; You will need to communicate your findings to a less data-savvy audience so ensure you understand the data!
Having selected your source(s) of market remuneration data there are then several quite different techniques that can be utilised to understand how current pay levels compare to the market. We’ve offered a summary of the more typical techniques below.
Use when hiring or having a retention discussion with existing employees.
Match your role to a survey role based on the content of both position descriptions in order to review the market trends for the role in question including base salary levels and the prevalence and typical value of allowances offered.
Similar to job pricing, this process allows analysis of an existing employee’s salary package compared to market trends. It’s important to assess both base salary and total package to understand competitiveness and explore the data further if your broader offering is not as well-positioned as base salary alone (e.g. what benefits are typical versus your own offering).
Generally undertaken annually or biennially, the objective is to test the Salary Ranges attached to your Grade/Band structure against the external market.
Match jobs as with job pricing but then aggregate the market data by Grade to enable testing against the salary range to assess general market positioning beyond any specific job family or role.
Effective and appropriate benchmarking can provide a quantitative input for decision making and also offers a rearview mirror – how well did we meet our targeted outcomes?
However, benchmarking is never conclusive in its own right. It doesn’t tell us whether arrangements are appropriate or not (though it may help understand potential effectiveness) as we need to consider those situation-specific factors mentioned above.
Essentially, we need to contextualise the numbers in order to decide where we need to pitch remuneration and, when looking at past outcomes, whttp://www.mastertek.com.auhether our programs have been effective. Traditional approaches have tended to focus on the relative positioning of remuneration, but ignore the performance aspect.
Given one of our principles is to reward performance we need to adopt a different approach such as referencing our Performance Pay Index which offers some great insights into the correlation between pay mix and company performance.
In the chart above we are looking at a map of the Performance Pay Index results for CEO’s across the Top 100 ASX listed companies – we’ve highlighted the financial sector for example purposes (the green dots) and a specific CEO’s positioning in red.
In our standard index (where we use 3-year weighted ROE as the performance proxy) the median PPI score for CEO’s across the whole group is around 100 – i.e. a direct correlation between relative remuneration and relative performance levels. Of course, this doesn’t consider absolute amounts paid to different CEOs (but that is a different benchmarking exercise).
You can see from these examples how we are able to take a more contemporary approach to benchmarking executive remuneration – an approach that more fully aligns with the sorts of principles your organisations will have adopted to underpin your reward strategy. This kind of information can really help you understand how effectively the reward programs are aligning with performance outcomes which will be fundamental to how stakeholders perceive the outcomes when you come to make your annual disclosure.
ASX Listing Rules require all listed companies to provide a detailed Remuneration Report within their Annual Report. The expectations regarding the information and discussion required for the Remuneration Report are high, as indicated by the following extract from an Explanatory Memorandum to the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2004
“In making disclosures about director and executive remuneration companies should approach their obligation from the starting point of providing shareholders with comprehensive disclosures. Shareholders should be placed in a position where they can understand the nature of the remuneration including any performance hurdles or contingencies on which the payment is based.
This will ensure shareholders are informed about the framework and main components of remuneration and understand the relationship between performance and remuneration. In addition the disclosure framework will limit the element of surprise in the event of a payment being made especially where that payment accrued over a number of years.”
We believe that the mandatory Remuneration Report be treated as an opportunity to gain a competitive advantage by effectively communicating your organisation’s reward strategy. Our advice is again consistent with the ASX guidance as compliance with listing rules requires an explanation of the extent to which you have followed the Corporate Governance Council’s Recommendations (or provided reasons for adopting alternative practices).
One of our favourite tests is to ask yourself ‘Will the RemCo chair be able to answer any difficult questions at the AGM?’. Our job in designing the reward programs is to make sure they will have all the answers, and that those answers are credible. This requires a clear philosophy, articulated through guiding principles. We then need to design our plans in accordance with these principles and with the situation-specific questions answered. Only then can we communicate openly and effectively.
Below we’ve suggested some ‘Golden Rules’ that can help your organisation capitalise on its Remuneration Report approach. The rules are aligned and in tune with legislative guidance from both the ASX Corporate Governance Council and ASIC to give you confidence that the outcomes will be compliant as well as adding value to your stakeholder engagement strategy more generally.
For tips and examples of best practices click below to read our Guide to Effective Remuneration Reporting.
Example: In the past we have seen tables which simply state ‘-’ in certain cells. If this is intended to mean “not applicable” then for the sake of avoiding confusion, state that!
Tips…
Example: Eighty percent of Executive’s at-risk pay is based on production volume as this determines shareholder return. A minimum threshold of x was required before any payout in accordance with the Business Plan.
Tips…
Example: Don’t simply refer to the Remuneration Committee, instead identify its members, note their independence and include (or at least make reference) to its charter.
Example: “A formula was used to determine STI payments” is very vague and should be replaced with a description of the formula.
It’s imperative that you use comprehensive benchmarking to inform your future executive remuneration design decisions. When drafting your Remuneration Report you can then also provide detail as to the nature and rationale of any market data used for comparison purposes to give shareholders confidence in the selected amounts of fixed remuneration for example.
Don’t rely simply on the dollar for dollar comparisons with other executives, make use of comprehensive benchmarking which factors in company performance, industry specifics, company size and other important factors as with our Performance Pay Index. That way you’ll be providing stakeholders with sufficient information to understand the benchmarking process and its robustness.
